Policymakers: Congress Must Move Quickly to Avert Damage

 

WASHINGTON (By Lori Montgomery, Paul Kane and Howard Schneider, Washington Post) September 23, 2008 ― The nation's top economic policymakers acknowledged this morning that an already extraordinary series of government actions has failed to stabilize global financial markets and said that Congress must act quickly on a proposed bailout plan to avoid dire consequences for the U.S. economy.

Arguing that the crisis on Wall Street threatens the jobs, savings and finances of every American, Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Henry M. Paulson Jr. said in prepared congressional testimony that debates about broader financial system reform should wait until the current crisis is resolved.

Postponing action on the Bush administration's bailout proposal is to risk "a continuing series of financial institution failures and frozen credit markets that threaten American families' financial well-being, the viability of businesses both small and large, and the very health of our economy," Paulson said.

His comments, along with those by Bernanke, are to be delivered before the Senate banking committee this morning as the Bush administration continues to push for quick action on a proposal that amounts to one of the federal government's deepest-ever interventions into the economy.

President Bush, in New York to speak before the United Nations, said he was "confident . . . that there will be a bipartisan bill that the Republicans and Democrats will come together to get this piece of legislation passed."

To aid the lobbying push, the administration said that Vice President Cheney is meeting with members of the conservative Republican Study Committee today to try to address their concerns about an expensive government rescue of private companies. Conservatives have challenged the cost and scope of the proposal, while Democrats have argued it should include help for homeowners.

"We certainly understand a lot of the questions up there," White House spokesman Tony Fratto said. "What the vice president and others will emphasize is that this is absolutely necessary to do right now. In no way should it signal any abandonment" of the free market system.

The message from Cheney, White House chief of staff Josh Bolten and other administration officials is "we had a very unique problem in our economy -- and this is the best way to deal with it."

In their testimony to the Senate Banking committee, Paulson and Bernanke listed the steps that the federal government has taken already to address the crisis, including the takeover of mortgage companies Fannie Mae and Freddie Mac, support for insurance giant American International Group, and provision of tens of billions of dollars in cash to central banks around the world.

Both agreed it has not been enough.

"Despite the efforts of the Federal Reserve, the Treasury and other agencies, global financial markets remain under extraordinary stress," Bernanke said. "Action by the Congress is urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy."

The bailout plan would allow the government to buy troubled U.S. mortgage loans from banks and financial companies, clearing from their books a problem that has threatened to shut down the global financial system. It could cost as much as $700 billion.

Although public aid for private companies "should be given with the greatest of reluctance," Bernanke said that the current proposal is needed because "the stability of the financial system, and, consequently, the health of the broader economy, is at risk. . . . At this juncture, in light of the fast-moving developments in financial markets, it is essential to deal with the crisis at hand."

Although the price tag has sparked opposition among some lawmakers, Paulson said that, in the current situation, size and speed are paramount. The program "has to be properly designed for immediate implementation and be sufficiently large to have maximum impact and restore market confidence."

Democratic leaders said yesterday they were near agreement with the Bush administration on key provisions of the plan, but the two sides remained at odds over other issues and were struggling to gain the support of rank-and-file lawmakers on both sides of the aisle.

Although the White House has warned of severe consequences if the bailout plan is not approved by Friday, lawmakers crafting the measure said their work may well stretch past that deadline.

The Bush administration is resisting changes to the measure being sought by Democratic leaders and many Republicans, including one that would grant the government authority to cut executive pay at firms that participate in the bailout and another that would guarantee that taxpayers share in the profits if those firms recover financially.

Meanwhile, rank-and-file lawmakers -- returning to Washington after a weekend in their districts -- voiced outrage that taxpayers were being asked to pay for the excesses of Wall Street and that Congress was being prodded to rubber-stamp the biggest federal intervention in the private market since the Great Depression. While Democratic leaders said they could embrace the bailout plan with certain modifications, a growing minority of lawmakers were starting to question the very premise of the Treasury Department's proposal.

Sen. Richard C. Shelby (Ala.), the ranking Republican on the Senate banking committee, yesterday issued a statement saying he was "concerned" that the bailout plan was "neither workable nor comprehensive, despite its enormous price tag.

"In my judgment, it would be foolish to waste massive sums of taxpayer funds testing an idea that has been hastily crafted and may actually cause the government to revert to an inadequate strategy of ad hoc bailouts," Shelby said, urging Congress to "immediately undertake a comprehensive, public examination of the problem and alternative solutions rather than swiftly pass the current plan with minimal changes or discussion."

Lobbyists have swarmed Capitol Hill to press lawmakers for changes to the legislation. Representatives of community advocacy groups from across the country yesterday appealed to Bernanke to include homeowners in the bailout.

Despite the pressures, Rep. Barney Frank (D-Mass.), who is taking the lead for Democrats in talks with Paulson , insisted that the measure was moving forward.

"There was nothing on Friday. There was a bill on Saturday. There's a lot more agreement today than there was on Saturday. So a great deal of progress has already been made," said Frank, who chairs the House Financial Services Committee.

Frank said Paulson agreed to government oversight of the bailout program, including an independent board that would monitor the expenditure of $700 billion to take troubled mortgage-related assets off the books of faltering firms. The three-page proposal Paulson gave lawmakers over the weekend would have permitted him to run the program without review by other federal agencies or the courts.

Frank said Paulson also agreed that the Treasury should use its power as the new owner of billions of dollars in mortgage-backed assets to assist homeowners at risk of foreclosure. Democrats are pressing for provisions to require the Treasury to force banks to rewrite bad loans for struggling homeowners and to forgive a portion of their debt, using programs at the Federal Housing Administration and other agencies.

Treasury officials confirmed that they were in talks on those issues and were "making good progress." However, big disagreements remain, both sides said.

One critical issue is whether taxpayers will simply buy up bad debt or receive some tangible assurance that they will share in the profits if the bailout works and the firms return to profitability. Several lawmakers, including Sen. Jack Reed (D-R.I.), an influential member of the Banking Committee, are pushing for a provision that would require participating firms to grant the government warrants to purchase stock.

Sources familiar with the Treasury's thinking said warrants would limit participation in the program. Only failing banks would be willing to give the government stock in exchange for buying up their bad assets, these sources said. But key Democrats said the point was critical.

"If this is an investment, the taxpayer should not be treated as dumb money," said Rep. Rahm Emanuel (D-Ill.), chairman of the House Democratic Caucus. "If we're going to buy these securities that are illiquid, toxic, we need to make sure taxpayers get an equity ride so they get to benefit on the upside."

Another point of dispute is Democrats' insistence that the government be given authority to cut the salaries of executives and restrict their severance packages if they take taxpayer money. Paulson has said such a move would be "punitive" and deter companies from participating in the bailout.

But Republican resistance seemed to be collapsing yesterday after Sen. John McCain (R-Ariz.), the GOP presidential nominee, endorsed the idea, saying participating executives should be paid no more than the "highest-paid" government official. That official is the president, who makes $400,000 a year.

Rep. Louie Gohmert (R-Tex.) said the very idea of the bailout had so scrambled the usual free-market ideology of the GOP that few Republicans were willing to defend executives who receive million-dollar paychecks while their corporations receive billions of dollars in taxpayer funds.

"There's just something repugnant about that," Gohmert said.

Gohmert was among dozens of lawmakers who took part yesterday in two meetings called to protest the bailout. Participants ranged from liberals complaining that the Bush administration's plan would do too little to protect homeowners to conservatives such as Gohmert, who demanded a cap on spending.

"I don't think there's anybody in this room that would vote for" the Treasury proposal, said Rep. Brad Sherman (D-Calif.), a junior member of the Financial Services Committee who convened one of the meetings.

The second meeting was organized by Rep. Jeb Hensarling (R-Tex.), chairman of the Republican Study Committee, a group of more than 100 conservative lawmakers. In an effort to tamp down rank-and-file concerns, Paulson spoke by phone with Hensarling. Hours later, Hensarling's group issued a statement citing 10 "conservative concerns" with Paulson's proposal, including charges that it abandoned free-market principles and that it simply cost too much.

By last night, aides to the Republican Study Committee began collecting ideas to construct their own "free-market alternative" to the Paulson proposal.

As activists and other lobbyists weighed in on the plan, the pressures on lawmakers were reminiscent of those after the Sept. 11, 2001, terrorist attacks, when Congress, out of a sense of urgency, greatly expanded the executive's national security powers.

"All of a sudden, things are happening lickety-split, resulting in an enormous concentration of executive power the likes of which no one has seen in the financial area before," said Stephen Kroll, a professor at American University's School of International Service.

Consumer groups are pressing for a provision that would allow bankruptcy judges to modify mortgages for homeowners facing foreclosure, a move that could prevent up to 600,000 foreclosures over the next two years, according to Mike Calhoun, president of the Center for Responsible Lending.

Democratic leaders have voiced support for the idea, and Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) included it in draft legislation he presented yesterday to Treasury officials. But the idea is fiercely opposed by the banking industry and failed earlier this year to pass the Senate, leading many observers to dismiss it as a bargaining chip.